HK, Shanghai bourses: The game is not the same

Investors in Hong Kong and Shanghai can now trade shares on each other’s bourses as the Stock Connect program got underway on Monday. While the cross-border linkage marks a key milestone in market development, it is worth bearing in mind the different features of the two exchanges.

The most obvious difference is the types of listed companies and securities. Hong Kong is more heavily weighted toward finance, energy, telecom and internet sectors. Gaming shares can only be found in Hong Kong while defense, Chinese medicine and Chinese liquor firms are only available in the Shanghai market. In terms of investment instruments, Hong Kong boasts a wider range of structured products and hedging tools.

Next is the investor structure. Hong Kong is a far more internationalized market. Foreign institutional investors are the main players here. According to data released by the HKEx, foreign institutions accounted for up to 41 percent of the total transaction volume last year.

Institutional investors as a whole contribute more than 60 percent of the trading volume of Hong Kong bourse. In Shanghai bourse, over 80 percent of trading comes from individual investors.

The type of investors determines the trading characteristic of a market.

Because of the hefty foreign capital involved, Hong Kong stocks are more sensitive to what happens overseas. The local bourse reacts strongly to monetary policy in the West and usually tracks the trend of the US and European stock markets. However, this doesn’t apply to the Shanghai A-share market, which tends to focus more on domestic policies and has been less interested in global macroeconomic issues.

Investors in the two markets also show different preferences in stock picking. Many Hong Kong investors prefer large-cap blue chips that have attractive valuations and stable dividend policies.

Meanwhile, mainland investors are known for their love of small-cap growth stocks which can potentially reward them with multifold return.

There are also discrepancies in technical practices between the two markets. Shanghai uses T+1 system in both transaction and settlement. Investors cannot sell on the same day what they have just bought; they have to wait until the next working day when the securities are already deposited in their accounts. Likewise, funds from stock sales are not immediately usable for trading.

But Hong Kong applies a T+0 system for the transaction date and a T+2 system for the settlement date, meaning investors can do day trades as often as they like. Stock sale proceeds can also be used right away for new buy orders. All transactions will be settled two working days later.

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